The Law @ Work

Are Payment Contingencies in Commission Agreements Worth the Paper They’re Written On?

Late last year, we discussed the Massachusetts Appeals’ Court decision in Perry v. Hampden Engineering Corporation. In that decision, the court held that commissions were “due and payable” under the Massachusetts Wage Act at the time an employee resigns or is terminated, even if they are not yet due and payable under the terms of the company’s commission agreement or plan. In its holding, the court reasoned that the Wage Act mandated when commissions are due and payable and that employers could not exempt themselves from that time frame by way of their commissions agreements. Because the Wage Act states that employees who separate employment shall be paid all wages, and the Wage Act applies to commissions that are “definitely determined” and “due and payable,” the court held that employers must pay separating employees all commissions that are “definitely determined” as of the time of separation.

Last month, a federal trial court in Massachusetts also held that a former employee was entitled to unpaid commissions under the Wage Act, despite an explicit statement in the employer’s plan that employees who voluntarily resigned were ineligible for incentive payments. Although this court did not rely on the holding in Perry, when taken together, these cases suggest a judicial trend towards invalidating payment contingencies that commonly appear in commission agreements and bonus plans.

In Israel v. Voya Institutional Plan Services, LLC, Joel Israel sued his former employer, Voya Institutional Plan Services (“Voya”), for approximately $32,000 in unpaid “bonuses” under Voya’s variable compensation plan (“Plan”). The Plan consisted of three types of incentive compensation: an individual component, a forfeiture component, and a discretionary component that was not at issue. The individual bonus value was a percentage of revenue generated by the employee when they convinced clients to allow Voya to manage their money for at least three months. The forfeiture component value was a per-capita portion of funds forfeited by other voluntarily-separated employees, so that remaining employees who assumed their workload could receive a portion of the departing employee’s forfeited incentive compensation. The Plan clearly stated that employees who voluntarily resigned were not eligible for bonuses.

After he requested a job transfer in 2014, Voya reviewed Israel’s employment records and discovered falsehoods in his application materials. Voya told Israel that he could either resign voluntarily or be terminated, and Israel decided to resign voluntarily. Voya therefore refused to pay Israel the bonus he earned during the final three months of his employment. Israel subsequently sued Voya, alleging that 1) he had actually been terminated and was therefore eligible for bonuses under the Plan, or 2) the bonuses were commissions he was entitled to by virtue of the Massachusetts Wage Act. While the court refused to hold in his favor on the first theory, it concluded that the bonuses were commissions under the Wage Act, and therefore, were due and payable to Israel once they were definitely determined, regardless of the Plan’s terms.

Voya argued that the compensation was a bonus, and therefore, outside of the purview of the Wage Act, because it was based on a continuing stream of revenue rather than a discrete sale, and that the Plan’s unmet payment contingency – that Israel remain employed until the date of payment – rendered the bonus not due and payable. The court rejected these arguments, finding that the compensation was a commission because it was based on revenue generated by an individual employee rather than overall business profits, there was no legal basis for treating stream-of-revenue compensation differently than revenue from discrete sales, and because the bonuses were paid routinely, like commissions, rather than infrequently, like bonuses. The court then concluded that the commissions were definitely determined, because the parties had agreed to a commission amount, and that they had been due and payable at the time of Israel’s separation. The commissions were due and payable upon separation even though Israel had not met the Plan’s terms, because the Wage Act protects against “unreasonable detention” of employee wages, including commissions, and the court was unwilling to sanction a practice it felt allowed employers to use arbitrary contingencies to unreasonably delay such payments.

This case is a good reminder that compensation that looks like a commission, sounds like a commission, and acts like a commission, will be treated as a commission regardless of what an employer calls it. Whether labeled a bonus, a commission, or anything else, compensation programs that operate like commission structures (i.e., variable compensation regularly paid and based on individual revenue or sales) will be considered commissions for the purposes of the Massachusetts Wage Act. In addition, this case suggests that the Perry decision may not be an outlier, and courts may continue this trend of holding that employers cannot avoid application of the Wage Act – which imposes treble damages and attorney’s fees on losing employers – through formerly acceptable contingencies in the employer’s internal plans and policies.